Question

Henderson Farms Inc. sells land to Harris Development Corporation for $2,000,000 It is also entitled to receive 6% of any future sales price of the developed land in excess of $5 million. Henderson Farms Inc. determines that its experience with similar contracts is of little predictive value, because the future performance of the real estate market will cause the amount of variable consideration to be highly susceptible to factors outside of the company’s influence. Additionally, the uncertainty is not expected to be resolved in a short period of time because Harris Development Corporation does not have current plans to sell the land. However, the following additional information becomes known to Henderson Farms Inc. two years after the contract was signed: Land prices have significantly appreciated in the market. Henderson Farms Inc. estimates that it is probable that a significant reversal of cumulative revenue recognized will not occur related to $150,000 of variable consideration based on sales of comparable land in the area. Harris Development Corporation is actively marketing the land for sale.

Required: Should Henderson Farms Inc. include variable consideration in the transaction price upon signing the contract?

How should Henderson Farms Inc. account for the new information?

Answer 1

Requirement 1

Consideration is measured variable if the amount a firm will collect is subject to on a future event whether it is arising or not arising. A firm will only include variable consideration in the deal price upon the signing the contract to the level that is apparent that a substantial setback of revenue will not befall when the ambiguity is consequently fixed.

Henderson Farms Inc. approximates that there is a noteworthy reversal of aggregate revenue acknowledged which is not going to arise connected to the variable consideration that is grounded on the similar land in the area. Therefore, Henderson Farms will only comprise the variable consideration in the transaction price upon the signing the contract.

Requirement 2

Journal entry made by Henderson Farms Inc. includes:

Cost of sales A/c            Dr.          2000000

          To Right to recover                                        150000

         To Land                                                           1850000